How credit card firms are stealing our money

Wednesday 19 June 2002 23:00 BST

ALL it takes is a swipe. It's so easy - and apparently so painless. Credit cards have transformed the lives of all those of us engaged in retail therapy.

There is no more effortless transaction than the zip of plastic through an electronic reader, the brief pause, the polite buzz of the slip being printed, and the easy signature. You could almost believe that no real money has changed hands. But it has - and how. In fact, few realise just how much their cards really cost them.

Behind each apparently simple transaction is a huge and increasingly competitive industry, dominated by the big banks, which does everything in its power to bamboozle the user.

In an era when all the emphasis is on providing the consumer with as much transparency and clarity as is possible, the credit card companies are the last bastions of obfuscation.

The complexity of credit card interest rates has risen exponentially with the amount of use. It is not, however, just a matter of complexity. Britain at present is enjoying a honeymoon of low interest rates with the Bank of England's main lending rate standing at just four%, the lowest level for 40 years.

And with inflation under tight control there is no immediate prospect that interest rates - which have now stood at the current level for more than six months - are about to rise.

One might expect, therefore, that credit card interest rates, like mortgage rates, bear some reasonable resemblance to the rate set by the Bank of England.

Sure, if you are lucky and assiduous, it is possible to get astonishingly low credit card rates for a few months as the providers suck you in with bargain offers.

But the reality is that most customers are tied into really punishing interest rates of up to 20% or more. If you are silly enough to use in-store credit cards, like those issued by House of Fraser and Marks & Spencer, and do not pay them off each month, you could be paying nearer to 30%. At a time of record low interest rates this must be regarded as a form of modern usury.

It has long been part of the commercial genius of credit card companies to hide the real cost of borrowing from their customers by quoting monthly, rather than annual interest rates and punishing late payers cruelly. In some cases, customers are charged even when the full balance has been paid off within specified time limits.

Now at least one banker has been frank enough to blow the whistle. Ian Harley, chief executive of Abbey National, is currently under fire because of the mistakes his bank has made in its corporate lending. But he has had the courage to blow the whistle on a whole industry.

His revelation to a House of Commons select committee that only consumers with a knowledge of 'calculus' could work out the real cost of borrowing on credit cards, casts a pall over an industry which has thrived on using smoke and mirrors to disguise its real charges.

Of course none of us should be surprised by this. It is no accident that Britain's banks are the most profitable in the world.

In addition to refusing to pay us interest on current accounts in the black and making large penalty charges on people who inadvertently move into debit, they are happy to overcharge us for the privilege of using plastic.

The great justification for high credit card charges is the level of fraud. Most of us have had the stomach-turning experience of receiving a phone call from the security office of a credit card company asking us if we really were in Cannes living it up at the Palace Hotel, when we were in fact in the suburbs near home paying for the dry cleaning.

Certainly, fraud has been rising. Last year, credit and debit card fraud soared 27% to £370m, after a 55% rise in 2000. But fraud, though expensive and difficult to police, represents a small fraction of the profits being raked in by the credit card companies.

Moreover, it is so prevalent because until recently the credit card operators and retailers were too mean to spend the estimated £1bn required to improve security. Such measures have been in place for several years in France where credit card users are obliged to key in a secure PIN number, before making purchases.

As is the case with most financial transactions, the dominant providers count on the conservatism of customers to maintain their fat and over-complex fee structures.

Because so many cards are connected to our bank accounts there is an assumption, exploited by the lenders, that customers who change their credit cards might in some way damage their relationship with the banks.

In recent times, however, there has been a concerted effort to break down these links.

Newcomers to the credit card market, like the American company MBNA and the internet bank Egg, shower us with tempting offers of zero rates for six months for credit transfers.

In my own household, I would estimate that half of the letters we receive are offers of credit cards, even though my two sons are university students with no immediate earning capacity.

But close examination of many of these offers reveals that once the new company has you captured, the rates quickly escalate and a charging structure, with no relationship to the cost which banks have to pay for money in the marketplace, is imposed.

Moreover, even those banks which clothe themselves in the mantra of 'ethical' practice engage in dubious behaviour.

The Co-operative Bank - which includes lectures on morality in the literature which it sends to credit card customers - recently launched a new platinum card offering zero rate introductory offers and a lower than standard credit card interest rate thereafter.

But when an existing Co-op Bank credit card holder tried to switch into the better deal, they were told it was only for the customers of other banks.

This is not untypical. Most banks appear to be offering new customers better terms for their credit cards than offered to existing clients. It was this two-tier structure in the mortgage market which recently led the ombudsman to order millions of pounds of refunds to home owners paying the higher rate.

There is, however, a silver lining to such usury. It could be argued that it is just as well that interest on credit cards is so high - if it weren't, Britain's credit boom would be even bigger. Unfortunately, Bank of England figures do not bear this out at all.

Despite the high and awkward charges, household debt has been rising inexorably in recent months and stands at record levels. The more that people borrow on their credit cards, the richer the operating companies become.

No wonder non-banks are getting in on the act, from British Gas, which owns the Goldfish card, to British Airways and football clubs like Chelsea.

Everyone wants to become part of a credit card culture where the profit margins are beyond the dreams of avarice.

Long-term, such credit card madness will end in tears as Britain accumulates unsustainable debts.

For the present, it is time that the Treasury, which has been threatening reform, acted to ensure that the great credit card deception is brought to a shuddering halt. After all, it's our money they are swiping.